When Does COBRA Become “a Deal”​ As Compared to An ACA-Based Health Insurance Policy?

I get calls every day asking questions about COBRA, “Cliff, is COBRA good coverage?” “Should I enroll in COBRA?” “I need to cut costs since I am transitioning to early retirement/changing jobs and COBRA is freakin’ expensive!”

So, let’s start at the very beginning by answering this question: What is COBRA?

Many people don’t even have an idea of what COBRA is except that it is expensive. Many do not know how the premiums are calculated, and if they should enroll in an ACA plan instead.

So let’s answer this question with these three basic points about the current health insurance policies.

FIRST, WHAT IS COBRA?

Passed in 1986, the Consolidated Omnibus Budget Reconciliation Act (COBRA) is a basic continuation of the previous employer’s group health plan during your unemployment, early retirement, or next employer’s waiting period for up to 18 months and in some cases 36 months.

COBRA health insurance benefits are the same as when you worked for your former employer. These benefits will change as your previous employer makes changes during their annual open enrollment.

Before the Affordable Care Act, COBRA was necessary for those with pre-existing conditions because they could not get underwritten-based individual insurance at all, or at least get coverage for the pre-existing condition.

So, when people ask me if COBRA is good coverage, I always ask if they liked their health insurance coverage when they were employed?!

SECOND, WHAT IS COBRA PREMIUMS BASED ON AND WHY IS IT ALWAYS SO EXPENSIVE?!

COBRA premiums will always cost more because the portion covered by the employer is no longer being paid by the employer towards your total premium costs. To make matters worse, an additional 2% is added for administrative costs!

So for example, if your monthly paycheck deduction for health insurance was $200 per month, and the company was paying $300 towards your premium, the full premium cost would be $500. Then, you would add the 2% administrative fee for a total of $510 per month for your COBRA premium!! To most people, the realization of this jump would be seen as expensive, compared to when you were working for your previous employer, as it should be,.

LASTLY, HOW CAN COBRA BE A VALID CHOICE VS AN ACA PLAN?

To simplify how this works, the underlying group health insurance plan is based on the average age of all enrolling employees to the group health plan. The average age of the group establishes the main foundation of the health insurance plan’s premium cost.

To understand, if two different companies had the same health insurance plan with the same insurance company, the older average-aged group would expect to pay more in their health insurance premiums versus a younger average-aged group. Every year at renewal, this average age is re-evaluated to lock in the next year’s premiums.

NOW LET’S ANSWER THE QUESTION!

As with most health insurance based questions, the answer is not a cut-and-dry answer cause there are a few more variables that I have not addressed yet in this article; but I will give you some general rules to consider before making your final decision on whether to transition to COBRA or an ACA health insurance-based plan.

Here are those general rules:

  • The older a person is above the average employee age of the company’s health plan, COBRA becomes more price competitive versus the marketplace plan. This is because you are charged by the average age of the company, not your actual age. As you approach 55 years of age, the rates would be more expensive with the ACA plans because they are charging you for your actual age instead of the group’s average age with COBRA. In Florida, most groups average 38 – 42 years of age.
  • Make sure you compare apples-to-apples coverage between your ACA plan and your current COBRA plan. Everyone should have a current copy of the summary of benefits of your COBRA option available to compare against an alternative ACA plan. This will ensure that you know if you are comparing two like-based health insurance plans or not, and weighing the premium costs appropriately.
  • You need to determine if you are eligible for a premium tax credit on an ACA marketplace plan. Here in Florida, if you and your household’s income are below 400%, but above 100%, of the poverty level; the cost of COBRA exceeds 9.5% of each person’s current year MAGI income; and you or another family member is not eligible for another group health insurance plan, you are likely to be eligible for a Premium Tax Credit. Using an ACA subsidy calculator would be a quick and easy way of determining if you and your family are eligible for any premium tax credit and give a price estimate of the 2nd lowest ACA based silver premium in your residential zip code.
  • How much does keeping your in-network doctor matter to you? If you cannot find a doctor in an ACA on- or off-exchange marketplace-based insurance plan’s network, COBRA becomes more competitive as a non-priced factor unless you are willing to change your current in-network doctor. COBRA group networks tend to be more comprehensive in many cases, but here in Florida, there are some ACA plans with the same networks as group plans, so you would have access to the same doctors, facilities, and hospitals as the group’s network.

In conclusion, compared to premium pricing against a non-subsidized ACA plan, as you approach 55 years of age and beyond, you should expect to stay on your current COBRA plan as long as possible. However, you should evaluate the non-premium considerations, as well as subsidy eligibility, that may influence the clarity of your decision.

Before making a decision, it’s a good idea to explore your options with a licensed health insurance agent/broker like myself. You can reach me by going to my website, www.incompasinsurance.com, or via mobile/text at 954.326.9613 for an appointment!!

Cliff Eserman - Author

About the Author

Clifton Eserman is a registered, licensed health insurance veteran with a 4-year degree in Finance from the University of Louisiana at Monroe and a minor in Labor Economics. His clients like the fact that Cliff explains complex policies in ways that anyone can understand. His philosophy has given small businesses the opportunity to adapt to the changing landscape of health insurance and take advantage of the ACA as a win-win. His foresight has made him a unique leader in employee benefits for small businesses.